Yahoo Finance Donate to charity like the super-rich – and cut your tax bill
To date, MacKenzie Scott – ex-wife of Amazon billionaire Jeff Bezos – has given away around $14.1bn to more than 1,600 charities. To donate such a large sum of money, she has used donor-advised funds (DAFs), a philanthropic vehicle that is relatively little known on this side of the Atlantic, but it can still be a good option for British donors – even if you don’t have billions to spare.
DAFs were invented in the US where an estimated $234.06bn of charitable assets are currently held in the structures, according to the National Philanthropic Trust.
“If you are a wealthy individual in the US, often you don’t set up your own personal foundation, you set up a DAF,” said Lyn Tomlinson, head of impact at Cazenove Capital wealth management.
The market in the UK is much smaller, the latest available figures show £2.2bn was held in charitable DAFs in 2021. While interest is growing – in 2021 the number of DAFs increased 20pc on the total in 2020 – they remain only a small part of the UK’s total charitable giving, worth £10.7bn in 2021.
The UK consistently ranks among the most generous countries in the world. In 2021, Britain was the fifth highest country for charitable giving, according to the Charities Aid Foundation’s World Giving Index.
Finding ways to support the causes you care about that are efficient, legal and in some instances, private, is an important part of wealth planning. Here, Telegraph Money has taken a look at donor-advised funds to tell you everything you need to know.
What is a donor-advised fund?
Donor-advised funds offer an option for charitable giving, providing an alternative to setting up your own organisation.
Donors pay into their own account, which allows them to allocate funds for charitable purposes that fall under the umbrella of the DAF.
The DAF itself is a legally registered charity, and the legal owner of all funds under its management. When someone makes a donation, it goes into their own sub-account and they decide where and when the funds are allocated – as long as their wishes are in line with UK charity law.
As assets under the control of the DAF must be used for charitable purposes they cannot be withdrawn, except to be used philanthropically.
John Canady, CEO of National Philanthropic Trust UK, said: “It is a trend that is coming to the UK and, increasingly, private banks and wealth managers are looking at how they can offer the service to their clients.”
Which companies offer DAFs?
In the UK, providers include National Philanthropic Trust (NPT) UK, Prism The Gift Fund and Charities Aid Foundation. Some wealth managers such as Cazenove Capital, part of Schroders, offer “white labelled” DAFs to their customers, which are ultimately provided by NPT.
Rennie Hoare, partner and head of philanthropy at private bank Hoare & Co, said: “We now have over 150 customers using [DAFs]. In the last five years, it has had an annual growth rate of just over 20pc. It is now very infrequently that people come to us wanting to set up foundations and standalone charitable trusts.”
What are the benefits of DAFs?
Often marketed to high and ultra-high net-worth individuals, donor-advised funds boast flexibility as one of their biggest draws – but there are plenty of others.
You can reduce admin
When funds are placed into a DAF it is the trustees of the registered charity who are responsible for all the reporting, due diligence and administration that comes with running a charity – a job that would fall to you, should you set up your own charity to facilitate donations.
“As a DAF we are dealing with all the administration and have all the regulatory responsibility,” said Charles Mesquita, charities director at Quilter Cheviot and trustee of Prism The Gift Fund.
“To some degree, the Charity Commission is encouraging this. You can give directly to a charity or set up your own, but that comes with a cost and takes time to get approved by the commission, and then you have to manage the reporting.
“Setting up a DAF is essentially a very simple thing to do. From a donor’s point of view you can put the money in very quickly and do whatever you want to do for the public benefit,” he added.
You can give to multiple causes
DAFs allow donors to have oversight of their funds, and offer the flexibility to give to multiple causes, without the time constraints and risk that can come with managing their own organisation.
If a certain cause is particularly important to you, setting up a DAF can be a way to funnel funds to multiple charities that may all support different facets of the same cause. For example, supporting a large cancer charity as well as a local hospice.
The funds can be put aside for growth
Funds can be put aside for charitable purposes without having to donate right away. DAF providers offer access to investment strategies to help grow the funds, increasing the amount donated.
And, as more scrutiny is placed on the sources of philanthropic giving, DAFs allow donors to manage the way in which their funds are grown. Increasingly sophisticated DAF arrangements allow donors to choose tailored investment strategies that are in line with the causes they believe in.
For example, a donor looking to direct their money towards efforts to combat climate change will likely want to avoid investing in oil and gas in order to increase the funds.
“Over 70pc of our clients are invested in sustainable and impact investing funds. They have aligned their asset growth in a way that matches their philanthropic position,” said Ms Tomlinson.
DAFs can cut your tax bill
DAFs can also take ownership of illiquid financial assets, the most popular being public shares – but some are also equipped to manage less traditional assets such as art, although it is at the discretion of the provider how this is done.
Such assets can be held on trust until the donor wants to give them away, while donating art or property to a DAF could see them immediately liquidated, making it easier to manage the money and ultimately get it to charities.
There is also a dual tax benefit to be had here. Gifting shares to charity saves on capital gains tax, as charitable organisations aren’t taxed on sale as the donor would be. The donor also saves on capital gains, as they are not charged when they donate the shares.
It can also reduce your inheritance tax bill. Placing assets in a DAF legally removes them from your control and therefore from your estate, making them exempt from inheritance tax (IHT), leaving more for the causes you care about.
“You have to leave at least 10pc of your estate to charity in order to get an overall reduction in your IHT bill. It can be a lot more tax efficient and rewarding if you can afford to do your giving in your lifetime,” said Alexandra Loydon, partner at St James’s Place.
Furthermore, it may be more helpful to a charity if you donate in your lifetime via a DAF a guaranteed income over a longer period of time, rather than leave your assets in your will as a lump sum.
They offer a private way to donate
For high and ultra-high net-worth individuals another big draw is the privacy DAFs offer. As the provider only files one set of accounts with the charities commission, all of the individual pots of cash are anonymised. This is beneficial on a large and small scale.
On a bigger scale, a significant gift to a cause from a celebrity is likely to be picked up by the media – such attention may be unwelcome. On a smaller scale, an individual may have the means to donate to a local cause without wanting to draw attention to themselves within their community.
What about the downsides?
There are drawbacks to using DAFs. As the money ultimately goes to an existing charity you are unlikely to have a say over how it is used once it has been donated, although in some cases carve-outs can be made.
If you want to direct your own project it may make more sense to set up a new charity, provided the funds are available to staff and run the organisation.
However, for many philanthropists, DAFs offer a hassle-free way to give as they wish.
“If you want to be giving to different charitable causes then a DAF is the perfect solution,” said Mr Hoare.
“To be honest I don’t think we have really scratched the surface and that’s the thing that excites me.”
How DAFs can work in practice
Imagine a successful entrepreneur who has agreed to sell their business for £50m, but as a condition of the sale they have agreed to stay on at the company for another two years.
They want to give a substantial chunk of the money from the sale to charity, but are unlikely to have the time to manage it themselves.
Putting the money in a DAF, under an investment plan, allows the money to grow while the individual identifies the causes they want to support. At the same time the donor benefits from the tax relief on charitable giving, making the sum exempt from income tax.
Recommended
The personal taxes draining your income – how to make sure you don’t overpay
